Cyprus Sets Up Tight Controls as Banks Prepare to Reopen

Waiting for an A.T.M. in Nicosia, Cyprus, to operate. Banks, which have been closed since March 16, will reopen on Thursday.Credit
Milos Bicanski/Getty Images

NICOSIA, Cyprus — The Cypriot government on Wednesday announced severe restrictions on access to funds held in the country’s banks, hoping to control a rush to withdraw money when the banks open Thursday for the first time in nearly two weeks.

The measures, which are supposed to be in effect for only a week but are widely expected to be extended in some form well into the future, will prohibit electronic transfer of funds from Cyprus to other countries. In addition, individuals will not be allowed to take more than 3,000 euros (about $3,860) in cash outside the country, well below the current ceiling of 10,000 euros.

The cap on withdrawals from automated teller machines will rise to 300 euros a day from 100 euros, but credit and debit card charges will be limited to no more than 5,000 euros a person a month. Banks will not cash checks; they will accept checks as deposits, but many people will no doubt be reluctant to put more money into a bank. Bank clients also will not be able to withdraw money from fixed-term deposits before their maturity date.

“This is a typical set of exchange control measures, more reminiscent of Latin America or Africa,” said Bob Lyddon, the managing director of IBOS, an international banking association. “There is no way these will only last seven days. These are permanent controls until the economy recovers.”

To make sure enough cash is on hand, the European Central Bank sent an airplane filled with about 1.5 billion euros in a container to Larnaca airport near Nicosia on Wednesday. The container was loaded onto a truck and escorted by police to the Cypriot central bank for safekeeping, said a person with knowledge of the operation, who requested anonymity because he was not authorized to speak publicly.

The person said the European Central Bank had indicated it would continue flying cash to the country as needed.

The Cypriot finance minister, Michalis Sarris, said Wednesday that a flood of withdrawals was bound to happen quickly anyway, but that the restrictions would at least help stem a mass flight of deposits.

“Each day that banks remain closed creates more uncertainty and more difficulties for people, so we would like to do our utmost to make sure that this new goal that we have set will work,” Mr. Sarris said.

Despite those strictures, the Cypriot authorities are bracing for as much as 10 percent of the 64 billion euros on deposit in the country’s banks to be pulled out on Thursday.

Experts predict a much bigger bank run whenever the controls are eventually lifted or eased further.

“If you don’t impose the controls, the money is going to fly,” said Mujtaba Rahman, a senior analyst at the Eurasia Group. “But when you remove those controls, clearly the money is going to leave anyway. So they’re in a Catch-22.”

As part of the effort to clean up the situation, the chief executive of the Bank of Cyprus, the nation’s largest bank, was fired Wednesday by the central bank, along with the bank’s entire board. He will be replaced by an administrator overseeing the bank’s consolidation. That move came in consultation with the so-called troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund — that are completing the terms of a 10 billion euro bailout for Cyprus to help it absorb the blow from the collapse of its outsize banking system.

Photo

Banks in Nicosia remained closed on Wednesday as officials discussed ways to prevent a flood of withdrawals when the banks do reopen.Credit
Katia Christodoulou/European Pressphoto Agency

Also, President Nicos Anastasiades announced the opening of a criminal investigation into how the country’s banks had been brought to the brink of collapse. His aim, he said, was “to find and attribute responsibility wherever it belongs.”

Stress has intensified in recent days in Nicosia, the capital, as Cypriots have grown impatient waiting for the bailout deal to be completed so the banks can reopen and they can get somewhat greater access to their money. Many are also angry at what they see as the inept handling of the situation by Mr. Anastasiades. Others harbor suspicions that the I.M.F. and Germany are punishing Cyprus in part because of its role as a money haven that opened a window for wealthy foreigners to move their funds into the euro zone with few, if any, strictures.

Demonstrations that attracted hundreds here last week have swelled into gatherings of thousands of people who have grown more agitated as they realize that their future under the terms of the bailout will be bleak.

Thousands of employees will lose their jobs at Laiki Bank, the country’s second-largest bank, which is being wound down. And the freezing of accounts at all banks since March 16 means businesses have not been able to pay their employees. Importers have also not been able to pay their bills, raising concerns about shortages of basic goods on an island that imports almost everything it consumes.

The governing class is trying to deflect blame for the debacle.

Mr. Anastasiades has started making incendiary statements about the central bank president, Panicos O. Demetriades, hinting strongly that he wants to see Mr. Demetriades ousted. That, in turn, has raised concerns about the central bank’s independence.

“The knives are out,” said a person with knowledge of the situation, who requested anonymity because he was not authorized to speak publicly.

The cost of bailing out the island’s two largest banks, the Bank of Cyprus and Laiki, is to be borne by the banks’ large, uninsured depositors.

At a news conference on Tuesday, Mr. Demetriades said he expected big depositors at the Bank of Cyprus to sustain a “haircut,” or loss, of about 40 percent on their 14 billion euros in long-term deposits. In exchange, depositors will receive shares in a recapitalized bank.

But with the economy deteriorating rapidly, major depositors may have to take an even bigger loss so that the Bank of Cyprus can free up cash to protect its rapidly deteriorating loan book.

Laiki, also known as the Cyprus Popular Bank, is even worse off. About four billion euros in deposits there will be transferred to a so-called bad bank, and those assets will most likely be wiped out as the bank is wound down.

Under European Union treaties, restricting the free movement of capital is forbidden. Critics say that what is happening in Cyprus shows that union rules will be flouted when the International Monetary Fund, the European Central Bank and European Union leaders find it convenient to do so.

By imposing capital controls, European and Cypriot officials have effectively created two classes of euro: cash that can be freely spent, and cash that is locked up by capital controls, effectively diminishing its value.

“It has to be acknowledged that this is something entirely new,” said Nicolas Véron, a senior fellow at Bruegel, a research group in Brussels, and a visiting fellow at the Peterson Institute for International Economics in Washington. “This will shape expectations in other countries, and the issue is whether capital controls can be avoided in future episodes.”

Landon Thomas Jr. contributed reporting from Nicosia.

A version of this article appears in print on March 28, 2013, on page B1 of the New York edition with the headline: Cyprus Sets Restraints As Its Banks Open Again. Order Reprints|Today's Paper|Subscribe